Hello and welcome to the Orthofix Second Quarter 2016 Earnings Conference Call. Today's call is being recorded. I would now like to turn the call over to Mr. Mark Quick, Director of Business Development and Investor Relations. Please go ahead, sir.

Thanks, operator, and good afternoon everyone. Welcome to the Orthofix second quarter 2016 earnings call. Joining me on the call today are President and Chief Executive Officer Brad Mason, Chief Financial Officer Doug Rice, and Chief Strategy Officer Mike Finegan. I'll start with our Safe Harbor Statement and then pass over to Brad. During this call we'll be making forward-looking statements that involve risks and uncertainties. All statements other than those of historical fact are forward-looking statements, including any earnings guidance we provide, any statements about our plans, beliefs, strategies, expectations, goals or objectives. Investors are cautioned not to place undue reliance on such forward-looking statements as there is no assurance the matters contained in such statements will occur. The forward-looking statements we make on today's call are based on our beliefs and expectations as of today, August 1, 2016. We do not undertake any obligation to revise or update such forward-looking statements. Some factors that could cause actual results to be materially different from the forward-looking statements made by us on the call include the risks disclosed under the heading Risk Factors and our 2015 10-K, as well as additional SEC filings we make in the future. If you need copies of these documents, please contact my office at Orthofix in Lewisville, Texas. In addition, on today's call we will refer to various non-GAAP financial measures in which we exclude certain items from our U.S. GAAP financial results. We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to review these matters as a supplement to financial performance measures determined in accordance with U.S. GAAP. Please refer to today's press release announcing our second quarter 2016 results for reconciliation of these non-GAAP performance measures to our U.S. GAAP financial results. At this point, I'll turn the call over to Brad.

Thanks, Mark, and good afternoon everyone. I will start by giving you a summary of our second quarter 2016 performance, after which Doug will walk you through the financial results that we reported today. I will then follow up with a few thoughts about our expectations for the rest of the year, before opening it up for Q&A. The second quarter results continued our trend of demonstrating solid and consistent performance. Overall our results were in line with our expectations. I'll start by walking you through our key financial results for the quarter. Starting with the top line, our net sales growth for the quarter over prior year was 3.1% on a constant currency basis. A key driver of this growth once again was the outstanding performance of our BioStim strategic business unit, or SBU, which grew net sales 10% over the prior year. The growth was primarily driven by increased order counts from an expanding customer base and our order-to-cash process improvements that increased the overall percentage that we collect on orders. This business significantly outperformed the market growth rate due to the exceptional execution of our strategic priorities by a very seasoned and outstanding team. This Q2 performance continues to demonstrate the strength and potential of this SBU, which has produced a trailing 12-month growth rate of 10.2%. We expect net sales to remain strong the rest of the year but expect that our growth rates will normalize into the mid-single-digits as we face tougher year-over-year comps in the second half of the year. Net sales in our Biologics SBU declined 6.7% for the period due to our reduction in Trinity volume, which was primarily a result of an exclusion from a large national hospital account, as well as an increase in competing product offerings. We remain optimistic…

Thanks, Brad, and good afternoon everyone. Before we get started with the financials, as Mark stated earlier, let me remind you that many of the financial measures covered in today's call are on a non-GAAP basis. Please refer to today's earnings release for further information regarding our non-GAAP measures. I'll start with providing details into our net sales and earnings results and then discuss some of our other financial measures. Total net sales in the quarter were $104.1 million, up 3.1% on both the reported and constant currency basis from the second quarter 2015 total net sales of $101 million. As Brad mentioned, growth during the quarter was primarily driven by our BioStim and Extremity Fixation SBUs, and partially offset by challenges in our Biologics and Spine Fixation SBUs. Going through each of our SBUs briefly, BioStim's second quarter 2016 net sales were $44.8 million, up 10% versus the same period in the prior year. Biologics second quarter 2016 net sales were $14.3 million, a decrease of 6.7% versus the same period in the prior year. Extremity Fixation second quarter 2016 net sales were $26.8 million, an increase of 4.8% on a reported and constant currency basis in comparison to the same period in the prior year. On a constant currency basis, this SBU increased net sales 6.5% for the trailing 12 months. And lastly, Spine Fixation second quarter 2016 net sales were $18.2 million, a decrease of 5.9% in comparison to $19.4 million for the same period in the prior year. Now I'll move on to the rest of the P&L. Gross margin in the second quarter 2016 was 78.4%, essentially flat when compared with the prior-year period. We continue to expect gross margins to remain at these levels. Sales and marketing expenses were $46 million or 44.2% of…

Thanks, Doug. Looking ahead in the second half of 2016, we will continue to focus on executing the three key objectives I outlined previously: grow our top line faster than our markets, expand our margins, and continue to invest in clinical research to support our existing products and drive long-term growth. Our strategies to address all three of these objectives remain unchanged. Number one, grow our top line by continuing to expand and optimize our sales force, driving market acceptance of our technologies through clinical support and field training, and launching new and innovative products in all four of our SBUs through both internal development and technology licensing and acquisitions. Number two, expand our margins through improved operational efficiencies in SG&A and the absorption of fixed costs resulting from increasing net sales. And number three, the execution of our current preclinical and clinical work and the initiation of new studies remains an imperative for us to support both the use and value of our existing products, as well as the potential for new product offerings to drive long-term growth. Based on our year-to-date performance and current forecast, we are confirming our previous full year guidance of net sales at today's FX rates in the range of $412 million to $416 million. This represents a year-over-year growth rate of 3.9% to 4.9%. This range now includes a modest amount of net sales in Puerto Rico for the balance of the year, which, in addition to our better-than-anticipated net sales in our BioStim business, is expected to offset the softness in our Spine Fixation SBU that I mentioned a few minutes ago. We expect adjusted EBITDA for the full year to be between $69 million to $72 million. And this would be an increase of 13.7% to 18.6% over 2015. We expect…

[Operator Instructions] Our first question comes from Raj Denhoy from Jefferies.

Hi, good afternoon.

Hey, Raj. How are you today?

Doing great, thanks. If I could start a little bit with the Biologics and Spine performance, both you noted underperformed a little bit. You gave the explanation of a loss of hospital contracts I think in both of them, and on the Spine side you also lost a couple of surgeon customers. So I guess I'm curious if you have any more detail behind that, how short term in nature that will be, how long we could see the effects of that, things like that?

You know, the hospital account hit us in both of those business, Raj, and we're going to have to try to recover from that. It's going to hurt us for the year, there's no question, not insignificantly. But that said, in the Biologics business, we do have a lot of new distributors that are coming -- just now coming online and we expect that uptick to really contribute as we go through the rest of the year. We've also recently signed a new national distribution partnership agreement that I won't go into details on, but we're very hopeful about that agreement as well, and I'd like -- hopefully we'd be able to talk to you about that a little more at the next quarter. And then finally also, some of these studies we've gotten some very good reactions from the press releases on our studies, to promote the use and efficacy of our Trinity brand. So we're still confident that we will grow in Q3 and Q4. We've got a lot of good things happening. We got hit a little bit in the quarter but we expect to recover very well.

Okay. And maybe just a follow-up, it's a bit of broader question sort of related to that, but when you look at the growth in the back half of the year, even this quarter, kind of 3% to 4% is kind of where things are shaking out for you, and my sense is you're probably not satisfied with that level of growth. But you think about the things you can do to accelerate that as you move into next year, yet you still have chosen to buy back stock as opposed to using that capital to perhaps do M&A or do other sorts of things. And so I guess the question is really broad around your plans in a sense to accelerate that growth profile as we look out a couple of years here.

Sure, Raj. You know, I can assure you, we are very, very active on the business development side. We are shaking the bushes, looking for opportunities to find technologies, to find companies, to find products that fit within our core competencies, within our distribution channels, that makes sense financially, and that's where we run into a bit of trouble. There's a lot of people who are very proud of their businesses these days. So, you know, we understand that organically we're going to be -- we're going to have a limit on how much we can grow. So we are definitely looking outside our front doors to see what we can come up with, and we're going to continue to do that. In the meantime, with the stock repurchase plan, we're in a very good position on our balance sheet with or without the stock repurchase plan. It's not going to -- the balance that's left on that, the $20 million that's left on that is not going to cause a problem with us doing any deals that we would want to do. So we're going to continue to move forward with that, prudently, as we think the intrinsic value of our stock is less than where we think it should be, then we'll go forward and keep buying. But we're very definitely looking for inorganic opportunities, very much so.

Right, that's helpful. Thank you.

Okay. You bet, Raj.

Our next question will come from John Gillings from JMP Securities.

Hey guys. Can you hear me okay?

We can, John. How are you today?

Doing all right. I'm a little under the weather but I'll try to speak up.

Okay.

First, I just want to make sure that I'm thinking correctly about the improvements in order-to-cash that you mentioned in BioStim. Is this related to sales that are recognized when cash is collected or are you -- were you able to reduce the percentage you use for calculating doubtful accounts? I just want to understand how that impacts revenue, so, make sure I'm thinking about it the right way.

Sure. So when we get -- it's a really good question, John. So when we get orders in our BioStim business, we book a contra-revenue. We don't, you know, if we're not going to collect something and we have a pretty good idea that we're not going to collect, we book it as contra-revenue. So that decreases our net sales in that business. The better we can become at getting the right paperwork, processing the claims, proving the claims upfront, that whole order-to-cash process, the larger percentage of that -- of those orders that we received are we able to turn into revenue, the less contra-revenue that we recognize. So the more effective and efficient we are at getting in good orders, good, quality orders, and processing those well, the more we realize in revenue, if that makes sense to you.

Yeah, that makes sense. And then, so, is -- maybe you can just, in broad-brush strokes, help us understand how much that contributed in the quarter and if it's something that we would think might continue to contribute over the next couple of quarters or if it's sort of stabilized now.

Sure, John. So if you think about the quarter, there's really three things that drove the growth. We had increased order counts per position, for our existing position. We had increased number of doctor customers, in general, year-to-date we have, and we -- and then we had more revenue from the order-to-cash process. Think of those three elements in pretty much in thirds, that each one contributed about a third of that growth. But there's another element here to think about, and that's our -- that's the program we put in a couple of years ago now, Orthofix Direct, where, instead of a paperwork-dominated process, it's now on mobile devices, on iPads. That does a lot of things for us. It improves our order-to-cash process, it frees up time for our sales reps to move from paper pushing to sales. And eventually, as we complete that Orthofix Direct process improvement, we're going to tie it into the electronic medical record, we're going to make it very easy for our customer surgeons as well. So the Orthofix Direct helps all of those three things that I talked about, but if you think about it, about a third between the increased order count to increased number of physicians and the improvements in our order-to-cash process.

Okay, perfect. That's really helpful. And then just looking at the BioStim market as a whole. We thought of that as kind of a low-single-digit growth type market where you're the leader. But you've been growing significantly faster than that for the last few quarters. And you mentioned there might be some tougher comps ahead. But is there anything other than that? You know, has that market changed at all fundamentally in your view or you're just kind of saying, you know, we've taken back so much share already, we don't want to get too aggressive looking forward.

You know, I think that it's, you know, the market is under-penetrated overall. Our best estimate is about 40 percent-ish of the patients who should get this treatment modality, actually receive it. So there's a lot of room to expand this market through just penetrating the market better. That's why we're doing -- that's why we're spending the money we are in R&D, in our research efforts, to validate that. So my personal opinion about this market is that, yes, it is growing about the same pace as the procedure growth probably in Spine more than anywhere else. But it's a very strong market and it's getting stronger and we're helping make that market stronger and we're going to continue to. As we focus on the things that can drive the expanded use of these products, we're going to -- the market's going to grow. And there's plenty of room to grow this market. It's not just going to, you know, just kind of stay in the background, in the lower single-digit range. We think there's opportunity to grow it faster than that. It's not, you know, it's not short term, it's a long-term plan, but I think you're going to see some things that we'll talk about here in the next, could be weeks, could be months, that will help contribute to that as well. So we're, you know, if you look at Orthofix at our core, we're a stimulation company, that's a huge part of our revenue, it's a huge part of our core expertise, and that's where we're putting a lot of our effort.

Okay, that's helpful. And then just one last one from me, just a follow-up there. You talked about some of the things you're doing to potentially expand the market in BioStim, and there are three things that we've kind of been keeping an eye on that look really interesting, and I realize that some of these are several years away, but if you could just give us a little color on kind of where things are with odontoid fractures, that's a tough one to say, rotator cuffs, and the knee osteoarthritis, you know, those are three things that we think could be quite interesting ahead.

Agree. Agree. I'll talk about, the odontoid fracture has been -- study has been very difficult to enroll for a number of reasons. So that one, we have to figure out what we're going to do about that, whether we want to speed that up, if there's a way to speed it up or not. It's a relatively small market. It's only a $20 million market, but we thought it was important because it helped treat an unmet need, which is important to us as a company and important to how we contribute in, you know, from a community standpoint in what we do. And it also helped our physicians who would then have a treatment protocol that would help those people that they don't have today. And it also validates, further validates, the whole BioStim technology. So that one's a slow roll. The rotator cuff is in preclinical, so we have the animal studies done in behind us. The next step for us is to take that to an IDE and begin to enroll, and I would expect that to happen in the first or second quarter of next year, is what we're targeting right now. We'd -- I'd love these things to go faster, trust me. Unfortunately, they just -- some of these just take time. And then in terms of the osteoarthritis study, I hope to be able to report something to all of our shareholders very quickly about the enrollment there, enrolling our first patient. We are -- we have our centers open, we're ready, and things should be happening very, very quickly. I mean, within days if not weeks, to get our first enrollments of patients and move it forward quickly. And that -- and if you think about that study, there's a lot of osteoarthritis patients out there, so we expect to enroll pretty quickly once we get started.

Yeah, I would imagine so. Well, thanks guys and congrats on the quarter.

Thanks, John. I appreciate it.

Next we'll take a question from Jim Sidoti from Sidoti & Co.

Good afternoon. Can you hear me?

I can, Jim. How are you today?

I'm well. I'm well. I'm feeling good.

Good.

Question. On the charge to the SEC, I just want to make sure I understand this. You've settled the situation in Brazil with the DOJ, you've completed the restatement. So all those costs already in. So now this charge is to settle with the SEC related to those other settlements, is that correct?

That's generally correct. There's an FCPA issue and there's the restatement issues with the SEC. So these are ongoing discussions with the enforcement arm of the SEC.

Okay. Are there any other negotiations going on with the SEC related to other events?

No, sir. That's it.

So, assuming these are settled at some point in the next two quarters, you would think that in 2017 you would be past all these one-time charges?

The only charges that could be left for us that have to do with just indemnification of certain officers and things like that that we have commitments to do. But other than that, you know, if you think about where we are today, Jim, we've got -- we are -- our deferred prosecution agreement has ended. That case has been dismissed in federal court in Eastern Texas today as a matter of fact. The restatement issues are behind us. We've got very, very good dialogue with the SEC on those issues. The -- and then on the issues related to the FCPA action in Brazil, we're nearing completion in those discussions. We have one year left on our corporate integrity agreement and we are -- we're very happy about where we are with all of these -- the shareholder lawsuit has been settled. You know, all of these things are going to be great to get behind us, get it out of our financials and get it out of our day-to-day life. So we're very, very happy. The team has done an amazing job of getting this company from where it was to where it is, and just couldn't be more proud of what we've done and where we are today.

All right. And then on a similar note, you recorded a $0.07 charge for infrastructure investment, I assume that's Project Bluecore, and you indicated that's winding down. Is that correct?

That's correct. So that -- we will close out that project by yearend. We have more of the costs associated with Bluecore going to CapEx than OpEx that we expected, but -- so we'll see the depreciation on that over the -- in the years to come. But we're all done. Here's the good news. So we will end up actually about $1 million under our original budget and it'll be completed ahead of schedule. And we cut out a couple of work streams that ultimately we didn't need. But for this team to take a broken system and reimplement Oracle worldwide and do it for under budget and under time, that's just a remarkable feat, with no adverse impact by our customers whatsoever.

And Jim, this is Doug. Just to be clear, the Bluecore work streams will all be completed by the end of this year. So there won't be any more in 2017 or beyond.

So when Bluecore is complete and the issue with the SEC is settled and there's no more of these type issues out there, should we -- should 2017 GAAP EPS approach your pro forma numbers?

We're getting closer at that point. We'll still adjust EBITDA for share-based compensation and FX and some of those things. But the other adjustment items will certainly taper down.

Right. And then last question. If you do not exercise the eNeuro opportunity in the third quarter, will there be an impact on the P&L?

Say that again?

Will there be any impact to the P&L in the third quarter if we did not exercise -- no. The answer is no. I mean we're taking an -- we've taken impairments on that note that we have. There could be a positive or negative impact depending on how the modeling comes out for it, but nothing specifically that we would know to talk about today.

All right. Thank you.

You bet, Jim. Thank you.

And that does conclude our question-and-answer session for today. And at this time I'd like to turn the conference back over to Brad Mason for any additional or closing remarks.

Thank you, operator. Thanks for joining us on the call today. You know, we're very proud of the quarter, we're proud of what we've done year to date, particularly on the margin expansion. We've got some work to do in a few places. But when you think about the core of business, our BioStim business, it's never been stronger and we're very excited about that. Thanks for joining us today and we'll talk to you if not at Canaccord, then soon. Take care. Bye-bye.

That does conclude our conference for today. Thank you for your participation.